Kelley Drye Commentary

The big news in April for the Universal Service Fund was the possibility of the FCC imposing for the first time a cap on the overall fund. We cover the content of the draft NPRM below (to the extent it is known at the moment), and it is important to recognize that placing an item on circulation is no guarantee that the proposal will move forward. Many a proposal sit for months on end without any action (in contrast to an agenda item, which has a date certain attached to action). Nevertheless, the mere presence of the idea has stirred the pot. The item is in response to Commissioner O’Rielly’s advocacy, and he took to the FCC blog to defend the proposal. Commissioners Rosenworcel and Starks issued statements opposing the idea, while industry associations that advocate for USF programs complained that the proposal would pit one USF program against another and undermine the goals of universal service in the Act. Prospects for its advancement do not seem immediate.

We believe the proposal is yet another symptom of a broken contributions system, where the interstate revenue base continues to decline and the USF factor exceeded 20% for half of 2018. Reforming contributions will be a difficult task, made even more difficult by the lack of a consensus alternative. Nevertheless, until the contribution base is addressed, caps on the fund are like fingers in the dike; unless the bigger problem is addressed, the dam is going to collapse anyway.

Recent News

On March 26, the FCC began circulating a draft rulemaking that would establish an overall budget for the Universal Service Fund. Commissioner O’Rielly, long a champion of USF budgets, argued in favor of the NPRM in an April 2, 2019 blog. O’Rielly states that the proposed budgetary cap would be $11.42 billion, which would be above the total disbursement levels for the different USF programs. It is unclear whether the budget would individually allocate money across the different programs, but critics of the proposal argued it would pit each program against the others in competition for funds. Commissioner Rosenworcel deemed the cap “unacceptable” in her statement on the CAF rate floor item (discussed further below). It is not clear when, or if, the draft item will be addressed. Items on circulation ordinarily do not face a deadline for action by the Commission.

The FCC Office of Managing Director announced that the universal service contribution factor for the second quarter of 2019 will be 18.8 percent. The contribution factor has been at or above 17.9 percent since the third quarter of 2017.

The annual filing deadline for the FCC Form 499-A, for reporting revenues to assess USF contributions, was on April 1, 2019.

Schools and Libraries (E-Rate)

USAC released its responses to a March letter from O’Rielly concerning disbursement of e-rate funds that may support overbuilding of existing fiber networks. USAC responded that it conducts a thorough review of E-rate requests for self-construction to determine compliance with the E-rate program rules and whether the funding is “duplicative.” USAC also responded that it does not have data identifying the precise locations of carrier fiber networks and was unable to answer the question whether overbuilding was being funded. USAC stated that program rules require entities seeking to self-construct networks to seek bids for service from existing third-party fiber providers and to demonstrate that self-construction is the most cost-effective alternative.

USAC informed the FCC that the estimate demand for Schools and Libraries discounts for funding year (FY) 2019 is $2.896 billion—$1.91 billion for Category 1 services and $985 million for Category 2 services.

On March 27, 2019, the FCC’s Wireline Competition Bureau (WCB) informed USAC that the Bureau had approved the Schools and Libraries’ FY 2019 Program Integrity Assurance Form 471 Review Procedures.

Lifeline

FCC’s Office of Inspector General issued an advisory to alert Lifeline carriers and program participants about patterns of fraudulent methods it has uncovered during its investigations. The advisory outlines specific practices that OIG has identified as “rely[ing] on identity fraud and manipulation of [applicant] personal information” in order to bypass safeguards and create “phantom enrollments.”

USAC announced that in 2019, it will establish the representative accountability database (RAD) to validate the identity of Lifeline service provider representatives responsible for customer enrollment. Representatives will register in the RAD to receive an ID number that must be provided to the service provider which will be used to register the representative for NLAD and National Verifier credentials.

WCB issued a Public Notice seeking comment on an amended petition from TracFone Wireless seeking approval to expand its ETC designation to Tribal lands in certain federal ETC designation states—Alabama, Connecticut, New York, North Carolina, and Virginia—for the purposes of providing Lifeline services. Comments are due by April 22, 2019 and reply comments by April 29. 2019.

FCC and USAC announced that the National Verifier will fully launch in Alaska, American Samoa, the District of Columbia, Delaware, Maine, the Northern Mariana Islands, the U.S. Virgin Islands, and Rhode Island on May 7, 2019.

On March 8, 2019, the WCB partially granted a request for a one-time waiver of the biennial audit rules for ETCs also subject to a forensic audit from USAC because parts of the audits are seeking similar information. WCB waived the biennial audit procedures related to Form 497/NLAD analyses (Objective II, 2 and 3); review of eligibility determination, recertification, and certification forms (Objective III, 2); and analysis of data reported on Form 555 (Objective IV, 4-6) for the impacted ETCs.

High Cost/Connect America Fund (CAF)

On April 12, 2019, FCC Chairman Pai announced his plan to establish the Rural Digital Opportunity Fund which would put $20.4 billion towards investment in high-speed broadband networks. The Fund would distribute funding through a reverse auction to service providers that commit to deploying infrastructure that can provide up to gigabit-speed connections. In the announcement, Pai did not state whether this is intended to replace the CAF or if this fund would impact other USF programs.

At its April Open Meeting, the FCC adopted a Report and Order that eliminated the CAF rate floor rule (and the related reporting requirement) which reduced the amount of USF support a carrier received if it chose to charge customers a telephone service rate that was less than the floor amount. The FCC has determined that the practice caused rural consumers to have higher telephone service rates than necessary.

WCB and the FCC’s Office of Economics and Analytics announced that they are ready to authorize the 10 year CAF Phase II auction support for the winning bidders.

Rural Health Care

In its April news brief, USAC stated that it will be implementing updates to its rural health care program page and content over the coming months. The intent of the refresh is to make it easier to find information.

Kelley Drye’s Communications group prepares a comprehensive summary of pending appeals and guidance requests before the FCC relating to USF contributions issues. Due to the number of appeals and the FCC’s routine disposition of them, appeals relating to the imposition of late filing fees and petitions seeking waivers of the quarterly Form 499 revision deadlines are not included in this summary.

This list covers appeals filed on or after January 1, 2016. Pending appeals filed before January 2016 are not included.

Number of Appeals Pending

New Appeals Filed

Contribution Questions Pending

11

Tata Communications. Tata requests a waiver of the 12% threshold for calculating the LIRE in light of increases in the USF contribution rate. (filed Mar. 29, 2019).

In its petition, Tata asks to continue contributing to USF solely on the basis of its interstate end-user telecom revenues, thereby excluding international revenues from assessment. Tata’s contributions are already based on interstate revenues alone, pursuant to the Limited Interstate Revenue Exemption (LIRE), but it seeks to extend this exemption through a waiver of Commission rules. Tata believes that recent changes to its jurisdictional mix will change in a way that would preclude Tata from the LIRE. Under the LIRE rules, if less than 12% of a carrier’s combined interstate and international revenues is derived from interstate traffic, that carrier is exempt from contributing based on international revenues.

If the company were forced to contribute on the basis of all revenues, claims Tata, it would amount to a “draconian penalty” that exceeds Tata’s total interstate telecom revenues. According to Tata, the FCC should waive the rules and extend its exemption because such a dramatic increase in contributions would violate Section 254(d) of the Communications Act and have deleterious effects on the public interest, including undermining competition in the interstate telecommunications marketplace. The Commission has previously encouraged carriers faced with this massive contribution spike to file petitions for waiver—Tata is now taking the Commission up on its offer.

Gtek seeks to review USAC’s denial of its appeal to cancel the sanctions, interest, and penalties imposed for its failure to file a Form 499-A for 2010-2015. Gtek argues that the levying of sanctions was improper and erroneous because Gtek is a systems integrator that derives less than five percent of its revenue from the resale of telecommunications. Thus, Gtek asserts, it is qualified for the systems integrator exemption and is not required to file a Form 499-A. Alternatively, Gtek requests a waiver in light of its reliance on the Form 499-A instructions, the FCC’s longstanding systems integrator exemption policy, and the fact that the sanctions would surpass the revenue Gtek derived from providing interconnected VoIP service.

In 2019, Gtek renewed its request for cancellation of sanctions. Gtek argues that it is a systems integrator that receives less than five percent of its revenue from reselling telecommunications, and is therefore exempt from filing Forms 499-A according to the form instructions. Gtek contends USAC is trying to limit the systems integrator exemption to a subclass that offers ‘legacy’-type telecommunications—a definition that Gtek contends is unsupported by any prior Commission statements or by the language in Form 499. Gtek thus asks the Commission to rule on its 2016 appeal, reverse the USAC denial, and cancel the sanctions.

Request for Review of a Decision of the Universal Service Administrator (filed December 14, 2018).

In its request, Sprint asks that the Wireline Competition Bureau reverse USAC’s conclusion that Sprint’s reported allocations for bundles of telecom and non telecom services were unreasonable, and to reverse USAC’s decision to reject Sprint’s traffic studies. In connection with its prepaid card services, Sprint reported USF revenues as a bundled offering, using an allocation method it considered reasonable. USAC had begun an audit in September 2016 of Sprint’s 2016 Form 499-A filing. In the audit, USAC concluded that Sprint did not adequately support its allocation method and instead applied the USF safe harbor of treating 100 percent of the bundled revenues as telecommunications. Additionally, USAC rejected Sprint’s traffic studies to determine the jurisdiction of its prepaid services. Sprint appealed.

In the request for review, Sprint poses two questions: first, whether USAC erred when, in assessing the allocation of revenue for one prepaid bundled offering, it applied the 100 percent telecommunications safe harbor method due to an alleged failure to retain documentation of the allocation used; and second, whether USAC erred when it retroactively created and enforced new rules regarding the sufficiency of jurisdictional documentation, of which Sprint had no notice. Sprint contends that its allocation method was reasonable, that USAC did not have a valid basis to reject the method, and that USAC applied the safe harbor method allegedly as a penalty for the failure to retain documentation of the allocation. Sprint further contends that USAC acted unlawfully in retroactively concluding that Sprint’s traffic studies (which were filed regularly) were insufficient to justify the carrier’s reported revenue.

4. SLIC Network Solutions, Inc.Primary issues: Form 499-A deadline

Request for Review and Consolidated Action (filed April 6, 2018).

SLIC requests that the FCC review and reverse the decision by USAC to reject SLIC’s Forms 499-A submitted for 2014, 2015, and 2016, and that the Commission vacate the requirement that any revised Form 499-A that would yield decreased contributions be submitted by March 31 of year after the original filing due date (i.e., the one-year downward revision deadline). As a result of an error, SLIC’s non-assessable revenues were incorrectly reported to USAC as assessable revenues for the years 2008 through 2016. When SLIC tried to submit revised Forms 499-A and recover its overpayments, USAC rejected the filings as untimely, citing the One-Year Deadline Order. Because that order is still subject to petition for reconsideration and applications for review, SLIC has submitted this request for review.

Request for Review of Decision of the Universal Service Administrator (filed February 2, 2018).

Altice seeks reversal of USAC’s reclassification of revenues from certain geographically intrastate private line services as interstate in an audit of Lightpath NJ, an Altice subsidiary. In the January 2017 audit, USAC interpreted the FCC’s “Ten Percent Rule” to establish that geographically intrastate private lines are presumptively interstate, and to require carriers and their customers to furnish evidence establishing the appropriate jurisdictional allocation for private line revenue. Altice contends that this application of the Rule was incorrect and violated the prohibition against USAC’s resolving ambiguities in the Commission’s rules. USAC denied Altice’s appeal of the audit, and, in doing so, retroactively relied on the Wireline Competition Bureau’s Private Line Order, which offered a substantively new interpretation of the Rule for determining the jurisdictional nature of revenues associated with private line service, and created new burdens of proof and evidentiary standards for carriers. Thus, Altice requests that the Commission direct USAC to 1) reverse its audit finding and 2) not retroactively apply the Private Line Order.

Application for Review of Decision of the Wireline Competition Bureau (filed May 1, 2017).

XO Communications Services (XOCS) asks that the Commission review the Wireline Competition Bureau’s order denying several requests for review, including one by XOCS. In an audit, USAC rejected XOCS’s intrastate classification of physical intrastate circuits because XOCS could not produce evidence that the traffic was not interstate. USAC operated on the presumption that an intrastate circuit was nonetheless interstate unless XOCS could prove that the circuit’s traffic was no more than 10% interstate. In response, XOCS filed a request for review, which the Bureau denied in the 2017 Private Line Order. XOCS seeks review of the Bureau’s decision because, XOCS argues, it is in conflict with case precedent and Commission policy. XOCS contends that the Bureau misapplied the Commission decisions establishing the Ten Percent Rule and also that the Bureau, in effect, created new standards that could not be applied retroactively.

Application for Review or Clarification, or in the Alternative, Request for Waiver (filed May 1, 2017).

TDS filed an application for review of the Wireline Competition Bureau’s 2017 Private Line Order regarding application of the Ten Percent Rule for allocating jurisdictionally mixed intrastate private lines. In its application, TDS contests USAC audit findings related to the amount of interstate traffic carried by private lines. In 2012 USAC notified TDS of its intention to conduct an audit of the company’s Form 2011 Form 499-A filing. In response, TDS provided a list of private lines documenting the end points, showing that all but one had intrastate end points. TDS also furnished end user certifications collected during and after the audit period from certain 2010 private line customers. However, because TDS did not demonstrate that 10% or less of the traffic carried over its remaining end user private lines was interstate, USAC required TDS to make USF contributions on all remaining revenue reported in line 406 of Form 499-A. TDS filed a request for review of the audit report, requesting that the Commission reverse USAC’s finding, which the Wireline Competition Bureau denied four years later. The Bureau instead remanded the audit to USAC to consider additional documentation. TDS Metrocom thus filed an application for review of the Bureau’s order, arguing that it violates FCC precedent, is based on mistakes in fact, and violates the APA.

8. Eureka Broadband Corporation.Primary issues: Reseller revenues

Application for Review (filed Feb. 10, 2017).

Eureka submits its application for review of the Commission’s decision to remand to USAC Eureka’s 2007 petition for reconsideration. In 2003, Eureka responded to a USAC investigation concerning missing contributions owed by Eureka, for which Eureka had been billed for USF contributions by its underlying carrier, MCI, and which MCI was supposed to remit to USAC. During its 2003 investigation, Eureka contends, USAC did not try to confirm if MCI had remitted these charges to the Fund. Instead, in 2004, USAC chose to assess upon Eureka those same charges. Thus, in 2007, Eureka filed a petition for review, which the Wireline Competition Bureau denied. Eureka shortly thereafter filed its petition for reconsideration.

In response, after nine years, the Bureau remanded the issue to USAC for further consideration. Therefore, in this application, Eureka contends that the Bureau violated the APA and the Commission’s Rules by refusing to promptly act on Eureka’s earlier petitions; rendering an arbitrary and capricious decision in conflict with the directive that USF contributions are due only once with respect to any revenue stream; announcing a drastic policy change in its memorandum opinion and order, and applying that policy retroactively against Eureka; and reaching an erroneous finding as to whether the Fund had already been fully compensated USF contributions on the revenue in question.

Locus seeks declaratory rulings to clarify carriers’ rights relative to the treatment of private carriage revenues under federal law. Specifically, Locus requests rulings that revenues derived from private carriage offerings are exempted from non-USF Title II fees and North American Numbering Plan administration fees; that USAC’s policy of sharing Form 499-A revenue data with Title II Program administrators is unlawful; and that carriers must be afforded the opportunity for redress—both retroactively and prospectively—for these Title II fees calculated on private carriage revenues.

Request for Review of Decisions of the Title II Program Administrators (filed Nov. 2, 2016).

Locus seeks review of the decisions of Rolka Loube (TRS Fund Administrator) and Neustar (administrator of the LNP funding mechanism) for assessing revenues from both common carriage offerings and private carriage offerings. Locus argues that the Form 499-A is deficient for failing to provide carriers a means to segregate private carriage revenues from common carriage revenues. Locus therefore asks that the Commission instruct the Title II Program Administrators to recognize its private carrier status and to reissue invoices as requested; direct USAC to withhold private carriage revenues from data shared with the Program Administrators; order USAC to discontinue its policy of relying on the “primary” service identified in Line 805 of Form 499-A; and provide relief as appropriate.

On August 19, 2009, USAC submitted a list of outstanding policy guidance requests which it had presented to the FCC. Of the 6 individual items on that list, 3 were requests for guidance on USF contribution matters. Specifically, these concerned reporting on prepaid card revenue; the classification of Asynchronous Transfer Mode (ATM) and Frame Relay revenue; and the classification of VPN and Dedicated Internet Protocol revenue.

USAC requests clarification regarding the revenues to be reported by prepaid calling card providers. Prepaid cards present an issue for accurate assessment of revenue because they may be sold through a third-party distributor, sold without a face value, or sold at a discount. Further, the date on which a prepaid calling card is sold to the end-user may be ambiguous (because of sales through distributors or wholesalers), so it is unclear when a carrier should report the associated revenue. Because of the uncertainty surrounding these cards, USAC asked the FCC to identify the amount of revenue that should be reported and the date when such revenues should be counted.

USAC also seeks advice relating to revenue from Asynchronous Transfer Mode (ATM) and Frame Relay products. In its audits of Forms 499-A, USAC found several instances where this ATM revenue was classified as “non-telecommunications” because carriers considered it derived from an information service. USAC seeks greater clarity regaring the proper classification of ATM and Frame Relay revenue.

Finally, USAC seeks guidance on the revenue received from VPN and Dedicated Internet Protocol services. This revenue was related to data transport using IP, which, according to USAC, is similar to Private Line/Frame Relay. That revenue is supposed to be reported as telecommunications-derived, but carriers had classified IP revenues as “non-telecommunications.” USAC has requested guidance on this issue.